How States Tax the Deal of the Day
- Mar 26, 2013 | Gail Cole
As the federal government considers the Senate’s symbolic vote on the Marketplace Fairness Act of 2013, states are grappling with another issue raised by the Internet: how sales tax should be applied to the deal of the day.
We’ve all seen them: a Groupon advertising an inexpensive Las Vegas getaway or a Living Social coupon for 50% off a meal at the corner Moroccan restaurant. Savvy consumers eat and travel with impressive discounts thanks to such daily deals. And as savvy consumers tend to pay attention to each penny spent, they notice how much sales tax they're being charged on deal purchases.
It’s the kind of issue that helped create the Streamlined Sales Tax Governing Board, an organization designed to “simplify and modernize sales and use tax administration in order to substantially reduce the burden of tax compliance.” Both Groupon and Living Social sell throughout the United States and in multiple countries. In this country, at least, each tax jurisdiction could potentially tax daily deals differently. What’s a vendor of daily deals to do?
Streamlined Sales Tax States
An article in Forbes reported that the 24 Streamlined Sales Tax member states are “devising a uniform policy” regarding the application of sales tax to a deal of the day. That was in March of 2012. This is an issue that has been discussed by SST many times. Sherry Hathaway, a tax analyst for the Tennessee Department of Revenue who heads the SST working group on daily deals, told Forbes last spring, “There is wide agreement among the states that the issue needs to be clarified….” She acknowledged that “industry representatives are eager for a resolution.”
A glance at the SST Voucher Work Group web page reveals that many white papers have been written about vouchers and sales tax. Earlier this month, Tennessee, Oklahoma, South Dakota, Washington and Wisconsin presented a motion to the Governing Board “to adopt best practices relating to vouchers.” In other words, resolution takes time.
According to the Groupon FAQ page:
“A customer is not charged sales tax when a merchant’s voucher is acquired from Groupon. Sales tax may be charged and collected by a merchant when the voucher is redeemed, depending on whether the underlying product or service is subject to sales tax and whether or not the merchant has a collection obligation (e.g. a merchant may not have to collect tax in the state to which an order is shipped).”
A lot is left open to question, but at least it’s clear that customers don’t have to pay sales tax on the purchase of the voucher from Groupon. The explanation continues:
In some states, sales tax will be charged and collected by the merchant based on the full offer value of the voucher (amount paid by consumer plus Promotional Value) plus overspend (e.g. amounts in excess of voucher). In other states, merchants will charge and collect sales tax based upon the amount paid for the voucher plus any overspend (e.g. Promotional Value is subtracted before tax is computed).”
Clear as mud, isn’t it? Some states will charge sales tax on the full amount of the purchase, as if there was no coupon. Others will not include the amount of the coupon in the taxable amount. It all depends where the actual vendor is located.
The Groupon FAQ page singles out California, Kansas, Massachusetts, New York and Texas, all of which have detailed their position on daily deals and tax. In New York, for example, the amount of sales tax due depends on the type of product or service being purchased. In Texas, “[i]f the item purchased is taxable, sales tax is due on the full sales price, including any amount paid with the use of the deal.”
The Forbes article points out that when states tax the undiscounted amount of a sale, at local sales tax rates now averaging 9.6% nationwide, the appeal of the deal is drastically reduced.
The Silver Lining for Groupon
The silver lining here is that the businesses selling the product or service are responsible for collecting any applicable state and local taxes. The vendor of the daily deal does not have to deal with sales tax.
On the other hand, businesses offering discounts through Groupon, Living Social, and the like must pay close attention to their own state’s tax policy regarding daily deals.
How does your business handle sales tax changes?